Central bank moves aggressively to regain control and credibility in tough inflation fight
Following weeks of anticipation, the Bank of Canada has raised its benchmark policy rate by 1% to reach 2.5% in a bid to stifle inflation.
“With the economy clearly in excess demand, inflation high and broadening, and more businesses and consumers expecting high inflation to persist for longer, the Governing Council decided to front-load the path to higher interest rates by raising the policy rate by 100 basis points today,” the central bank said in announcing the move.
The BoC’s decision comes several weeks after the Federal Reserve declared its own 75-basis-point upward policy adjustment, which observers widely expected its Canadian counterpart to replicate in today’s announcement.
Both central banks are trying to negotiate a soft landing, aiming to bring scorching-hot inflation in line without provoking a recession in their respective economies.
Last week, RBC broke rank from the Big Six banks by predicting that Canada is in for a recession by next year.
“Inflation, labour shortages and rising interest rates will drag on Canadian growth, pushing the economy into a moderate contraction in 2023,” wrote Nathan Janzen and Claire Fan of RBC Economics in a note Thursday.
In announcing today’s decision, the BoC pointed to the ongoing conflict in Ukraine, as well as supply disruptions and domestic price pressures from excess demand.
“The Governing Council continues to judge that interest rates will need to rise further, and the pace of increases will be guided by the Bank’s ongoing assessment of the economy and inflation,” the central bank said.
